ch1 what is economics

A choice is a tradeoff

The economical way of thinking places scarcity and its implications, choices and centre stage.

Tradeoff - an exchange - giving up one thing to get something else

Example: on a Saturday night, would you study or go out?

Making a rational choice

One that compares the costs and benefits and achieves the greatest benefit over cost for the person making a choice.

Only the wants of the oerson making a choice are relevant to determine its rationality.

Benefit; what you gain

The gain or pleasure that it brings and is determined by preferences.

Preferences

What a person likes or dislikes and the intensity of those feelings.

Cost: what you must give up

Opportunity cost is the value of the next best thing you give up when you make a choice.

Example: what is your opportunity cost of going to a live concert?

1- the things you cannot afford to buy if you purchase the concert ticket.

2- the things you cannot do with your time if you go to the concert.

How much? Choosing at the margin

To make a choice at the margin, you evaluate the consequences of making incremental changes in the use of your time.

.The benefits from pursuing an incremental increase in n activity is its MARGINAL BENEFITS.

.The opportunity cost from pursuing an incremental increase in an activity is its MARGINAL COST.

Example: you can allocate the next hour between studying and messaging your friends. The choice is not all or nothing, but you can decide how many minutes to allocate to each activity.

Choices respond to incentives

A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice.

The central idea of economics is that we can predict how choices will change by looking at changes in incentives

Economics

The study of choices that businesses, individuals, governments and the entire societies make as they cope with scarcity and incentives that influence and reconcile those choices

Microeconomics

Study of choices that individuals and businesses make, the way those choices interact with markets, and the influence of governments.

Macroeconomics

Study of the performance of the national and global economics.

Positive statements

Can be tested by checking it against facts

Normative statement

Expressed by opinion and cannot be tested

Unscrambling cause and effect

The task of economics science is to discover positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works.

Economic model

Description of som aspect of the economic world that includes only those features that are needed for the purpose at hand.

Scarcity

The inability to satisfy our wants

Incentives

Reward that encourages an action or a penalty that discourages an action